John Olsen, CLU, ChFC, AEP is well-known to financial advisers who are seeking help with technology. A self-described “certified software junkie,” Olsen has been in financial services since 1973 and has operated Olsen Financial Group in Kirkwood, Missouri, since 1987. He began providing software consulting services to other advisors about 10 years ago. We recently asked Olsen for his thoughts on the state of retirement income planning software.
What trends have you seen in retirement software over the past five years?
Recently, a trend toward behavioral financial planning has resulted in software that tries to model how things work in the real world and how people behave in that world. Outfits like Financeware.com , E-Money Advisor, and Money Guide Pro let us look not at an assumed constant income need in retirement, but let us differentiate between needs and wants and to distinguish that both needs and wants are not constant over time.
One way of addressing this is the so-called “buckets of money” approach that will be familiar to all readers of this magazine. Recently Impact Technologies released a tool called Retirement Road Map that is built upon the idea that retirement is not a single event, but rather is a journey, and that the wants and needs in the various phases of that journey may differ. And if they do, so must the portfolios designed to produce income to fund those needs and wants.
Most retirement planning software still asks us to specify what client wants in the way of income, and it applies available resources — existing portfolios, ongoing contributions, pension, Social Security etc. — and tells us if the client can get there from here.
There’s a very interesting piece of software called ES Planner developed by Larry Kotlikoff (a professor of economics at Boston University) that takes a radically different approach. It starts not with desired income, but with resources, and tells us what income we can reasonably expect using what Larry calls consumption smoothing. It’s a fascinating approach.
Are there additional improvements you would you like to see in retirement planning software?
There are a few things that I would very much like to see. One would be the ability to model things like a longevity annuity, that is to say, a deferred immediate annuity that turns on at a future date. The second one is how long must distributions continue? Of course that’s the longevity risk, and I’d like to see software do that.
If a consulting client called and said “I’m thinking of changing my retirement income planning software,” how should they go about selecting the right software for their business?
The first question that you want to answer is, “What do you want this thing to do for you? And what don’t you want it to do for you?” The more specific you can get, the better you can determine the kind of software you want.
A second point that I try to make is that the best retirement income planning software for you as an advisor is the software that sees the process most closely to the way you see the process. For example, I have clients who are cash-flow driven folks. They want to see the implications each year on the client’s cash flow, perhaps including things like alternative minimum tax.
For those people, they need an analytical cash flow-driven program. For others, they simply want to know “Can I get there from here? Don’t tell me how to build a watch, just tell me what time it is.” And they might need something more like the traditional goal-based programs where you simplify the variables, such as income tax or investment returns, and you try to answer “Can I get there from here?” What I’m saying is the best kind of program is the program that sees the process the way you do.